Fraus omnia corrumpit in modern commerce

Modern commerce depends on a simple but powerful legal principle—a company is treated as a person distinct from those who own it. It can enter contracts, own property, incur debts and be sued in its own name. For more than a century, following the landmark decision in Salomon vs A Salomon & Co Ltd, separate juridical personality has been regarded as one of the cornerstones of modern company law.

Most of the time, the principle works exactly as intended. It encourages investment, facilitates entrepreneurship and provides certainty in commercial dealings. Yet, every so often, a court is confronted with a more difficult question. What happens when the corporate structure is alleged not to have been used to conduct business, but to frustrate the rights of creditors? At what point does the law cease to look at the company as a separate legal person and instead focus on the conduct of those standing behind it?

These questions were recently considered by the Court of Appeal, composed of Chief Justice Mark Chetcuti, and judges Robert G. Mangion and Simone Grech, in Sberbank vs Palmali International Holding Two Company Limited et on 23 June 2026.

The litigation arose from financing facilities granted by Sberbank to two Russian companies within the Palmali group. As security for those obligations, Palmali Holding Company Limited constituted itself as guarantor through a Guaranty and Indemnity Agreement dated 26 April 2016. According to the proceedings, Sberbank accepted this guarantee because Palmali Holding Company Limited possessed a substantial corporate structure, including a network of direct and indirect subsidiaries operating in the maritime sector.

The relationship between the parties subsequently deteriorated when the main debtors failed to satisfy their obligations. Sberbank alleged that the outstanding debt exceeded US$194 million, excluding interest, and consequently initiated precautionary proceedings before the Maltese Civil Court whilst simultaneously commencing arbitration proceedings in London in accordance with the contractual arbitration clause.

What transformed the dispute from an ordinary debt recovery case into a significant commercial law judgment was what allegedly occurred afterwards.

According to Sberbank, only days after precautionary warrants had been issued and arbitration proceedings commenced, a series of transfers took place within the Palmali corporate structure. The judgment records allegations that on 19 April, 27 April and 3 May 2018, shares held in indirect subsidiary companies were transferred to another Turkish company known as Gunesli Denizcilik Tasimaciligi Sanayi Ve Ticaret Anonim Sirketi, a company ultimately connected to the same beneficial owner, Mubariz Mansimov.

The bank maintained that these transactions were not innocent corporate reorganisations. Rather, they were alleged to have been deliberately structured to diminish the patrimony available to satisfy creditor claims. As reproduced in the judgment, Sberbank argued that the transfers occurred at a time when litigation between the parties was already underway and therefore constituted “deceitful and fraudulent transfers, intended to reduce the patrimony of PHL and its subsidiary companies with obvious prejudice to Sberbank’s rights”.

The legal significance of this allegation becomes apparent when one considers the doctrine of separate juridical personality. Ordinarily, the law respects the distinction between a company and its shareholders, directors or affiliated entities. Courts are generally reluctant to interfere with that distinction because commercial certainty depends upon it. If every creditor could simply disregard the separate identity of companies whenever convenient, the entire corporate system would be undermined.

Yet Sberbank’s case rested upon a different proposition. It argued that the protection afforded by separate juridical personality cannot become an instrument of fraud.

Indeed, one of the most striking passages reproduced in the judgment is Sberbank’s reliance upon a principle deeply rooted in Maltese jurisprudence in that our law is built on bona fides and no transaction is immune from the principle fraus omnia corrumpit.

The maxim fraus omnia corrumpit — fraud corrupts everything — has ancient origins, yet it continues to resonate within modern legal systems. The principle reflects a simple but powerful idea. The law will ordinarily protect legal rights, legal forms and legal structures. However, where those rights or structures are abused through fraud or bad faith, the law may refuse to allow the wrongdoer to benefit from them.

It was precisely this argument that Sberbank advanced before the Maltese courts. As recorded in the judgment, the bank maintained that where fraud is established and where separate juridical personality is being abused, the court should be prepared, in exceptional circumstances, to disregard the distinction normally existing between legal entities.

The court ultimately upheld the conclusions reached by the First Court and confirmed the relief granted in favour of Sberbank. In doing so, it accepted findings concerning the effect of the transactions within the Palmali structure. One of the most significant observations endorsed by the court was that the transfer of shares of subsidiary companies meant that the assets of Palmali Holding Company Limited, the guarantor, disappeared.

The court was equally dismissive of attempts to minimise the significance of the transfers through reference to alternative guarantees or potential remedies. In one passage, it described aspects of the appellants’ position as ingenious.

While judicial language is often measured and restrained, such remarks reveal the court’s scepticism towards explanations which failed to address the practical consequences of the transactions in question.

What makes Sberbank v Palmali particularly important is that it illustrates the continuing tension between two competing legal values. On the one hand stands legal certainty, which requires courts to respect the separate personality of companies. On the other hand, stands the principle that legal structures should not be manipulated in a manner which defeats justice or frustrates legitimate creditor claims.

The decision does not undermine the doctrine established by Salomon. Nor does it suggest that every corporate restructuring undertaken during litigation is suspicious. What it does demonstrate, however, is that Maltese courts remain willing to scrutinise the reality behind transactions where allegations of bad faith and fraud are supported by compelling circumstances.

What one can take from this judgment is that juridical personality remains a shield for legitimate business activity, but it cannot become a refuge from accountability. Where fraud is alleged and substantiated, the maxim fraus omnia corrumpit retains its force. Even in the most complex corporate structures, the law will ultimately concern itself not merely with form, but also with substance.